Thursday, July 2, 2009

Small Cap Stock To Buy - A Multibagger Potential

Have a look at this low valued small cap stock which could be a multibagger once economic condtions change. You may buy stocks of this company as small part of your portfolio to make gains whenever the business comes back on track and stock gets re-rated in stock markets.How much would it cost to set up a company manufacturing 6,600 tonnes of calcium hypochlorite, 9,900 tonnes of stable bleaching powder, 2,400 tonnes of monochloro acetic acid, 49,500 tonnes of sulphuric acid, 33,000 tonnes of chlorosulphonic acid, 65 tonnes of bromine across four factories in Andhra Pradesh and Tamil Nadu and allied services like a 9MW biomass power project? Certainly not Rs14 crore, which would hardly cover the cost of land, factory and office buildings and a few basic facilities. The cost would probably run into Rs100 crore. But just Rs14 crore is the market-cap of SRHHL (formerly Sree Rayalaseema Hi-Strength Hypo Ltd).

Nearly 45% of SRHHL’s total turnover comes from calcium hypochlorite which is exported all over the world. The company belongs to the prosperous TGV group of Andhra Pradesh which has other businesses such as caustic chlorine (Sree Rayalaseema Alkalies and Allied Chemicals), a three-star hotel, theatres and educational institutions.The problem is that the com-pany’s turnover for 2007-08 hardly budged from Rs115 crore to Rs121 crore. Also, it reported a lower profit after tax of Rs4.75crore, down from Rs5.61 crore.

The EPS (earning per share) was Rs4.66 but SRHHL skipped dividend ostensibly because the company was expanding the capacities of all its production units and needed to conserve cash. It has now increased its production capacities but demand has turned sluggish. You would think that it would be saddled with higher capacity for a while. Interestingly, over the nine months of the current year, sales and profits have been rocketing. The turnover was Rs163 crore, which was 135% of the entire turnover of 2007-08. Profit after tax over nine months was Rs12.88 crore, a surprisingly large jump. The improved performance has been possible due to higher volumes and better realisation in exports due to a weak rupee. For 2008-09, the company should post sales of Rs210 crore; and net profit should be Rs20.75 crore, translating into an EPS of Rs20.36.

Apparently, thepromoters have been increasing their stake by acquiring shares from the open market. At the current market price of Rs14, the market-cap is just Rs14.4 crore, although gross block alone is Rs65 crore and net block is Rs55crore. The stock is trading at just 0.72 times its EPS of 2008-09.

Small companies always suffer from low valuations but a PE ratio of 0.7 looks just too cheap.Listed on both the BSE and the NSE, the scrip is probably going cheap due to the poor investment climate at present and investor ignorance about this company. Worth a bet but not a stock for the long term, given the way the company’s financials are gyrating.Source: Lakshman.

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